Housing affordability index – Update to the end of Q4, 2006
Posted by markharrison on February 14, 2007
Yup, in a shock move, I’ve actually updated this in two consecutive quarters, rather than waiting 2 years!
For those of you unfamiliar with the index, this is a composite that tracks average UK house prices, average UK incomes, and interest rates. Basically, it measures the ability of the average person to pay the INTEREST the mortgage on an average house.
If you just want the headline summary – things aren’t too bad, house prices don’t look wildly overpriced compared to historical norms for this index. In fact, the index is about the level it was in 1984, but it is noticeably going up.
If you want to have a look at the index, look here.
If you are interested in the technical nitty-gritty, read on.
The house price data comes from the “Communities and Local Government” website (formerly known as the Office of Deputy Prime Minister.) It is “mix-adjusted”, which means that if one month a lot of big houses sell, and the next month a lot of small houses sell, the statistics take this into account and it doesn’t look like prices have gone because smaller houses sold better than bigger ones this month. (This is, as I understand it, particularly an issue in London where a lot of expensive house sales follow the city bonus cycle.)
The average incomes are from the Office of National Statistics. They are “seasonally adjusted”, but as good a source as any (and better than most.) The slightly annoying thing is that the ONS have changed their website around a lot since 2004, and thus I couldn’t find the older figures. Hence I used the ones from 2004 – which introduced a small error, since I only had the figures on a PDF, and has lost the spreadsheet, it means that figures prior to 1990 are only correct to two decimal places.)
The interest rates are from the Bank of England website. I’ve picked the “quarter close” figures which, again, is a methodology I picked before I ran the graphs. In some years, there was no change, in others there were many wild changes throughout the year, and there is an argument that I should have picked an “average for quarter”. I don’t believe that the different would have been material though.
The Bank of England are really running full pelt for transparency in their operations. Not only do they publish when the rates were changed, but they also now document which members of the MPC voted which way at each meeting.